Sterling Stutters on Weak Leadership

The pound has been on the back foot to welcome in the week. After rallying through the second half of last week, things were looking steady for GBP which appeared to shake off the political infighting within the UK government that had grabbed headlines for much of last week but further details have emerged over the weekend suggesting that Theresa May’s leadership is coming under increasing strain. Apparently up to 40 Tory MPs have signed a vote of no confidence in PM May, 8 short of party rules for a new leadership contest, which could see another UK general election on the horizon. This puts Brexit talks even further under the spot light as the UK comes under increasing pressure to agree terms with the EU. At this rate we remain none the wiser as to how Brexit will proceed and markets are now reflecting this uncertainty in GBP.

EURGBP is pretty much unchanged from where we opened last week so there hasn’t been too much of a shift but GBPUSD has dropped back over 1% from Friday’s highs already and GBP crosses are all under some selling pressure this morning. PM May will meet UK and EU business leaders today to discuss Brexit. Almost every single client I speak with is in favour of a transitional deal that preserves the status quo, how this can be achieved will likely be hotly debated as members of the CBI, institute of directors, amongst others as well as business leaders from bodies across the EU. I think it is fair enough to say that most feel there has been little to no progress since the vote over 16 months ago, most business remain in the dark as to how they will be impacted and until that clarity is found the UK will continue to struggle. This week attention will be back on the UK’s CPI inflation data due tomorrow, which is expected to show another uptick to 3.1%. Labour market data is due Wednesday and retail sales figures on Thursday and we have several BOE speakers across the wires during the week so plenty to keep our focus on. GBPUSD continues to find support around 1.3030/60 area, should this give way the pair has scope to drop back to 1.2765/1.2800 area. EURGBP still should find sellers on any rally towards .9000, a break above .9035 would be a concern for GBP but the wider range continues to be .8750 to .9035 where we have traded since early September.

In contrast, reports over the weekend are calling for the Golden Era of growth for the EU as the regions foundation in recovery have been firmly set. The prospect of continued easing from the ECB provides a secure backdrop for growth while inflation expectations are expected to remain below target but without concerns of deflation creeping back. Eurozone unemployment has clawed back to the best levels since January 2009 and the region is making progress in reducing systematic risks to the region. But Brexit should be a big concern for the region as well and uncertainty will begin to weigh should the divorce proceedings continue to be drawn out. The EU is far from immune to the Brexit fallout but for now it’s a background concern for most.

There is plenty of major data points to get our attention over the coming week and a number of key speakers from major central banks due across the wires as well. EURUSD has struggled for any meaningful pickup and as long as the ECB stand behind the single currency and its regions with the prospect of additional easing, EURUSD at least should be limited. Rallies towards 1.1660/90 area thus far find a zone of resistance, a break above there should see 1.1735 area tested quite quickly and that will test the resolve of the downtrend that has been in place in EURUSD since early Sept.

Central bank speakers this week kick off this evening with the BOJ’s Kuroda scheduled to speak in Zurich, The Fed’s Charles Evans is due to speak at an ECB conference tomorrow in Frankfurt while Yellen, Carney Draghi and Kuroda are all due to share an ECB panel discussion at 10.00am (GMT) Tuesday. This will be the major focus for trade tomorrow but as it stands it certainly feels like the US is still the only central bank looking at tightening or raising rates, while others look to remain accommodative and responsive to risks. Odds of a December rate hike have subsided somewhat in the last week but the greenback still holds just below 3 month highs.

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